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Fitch attributes Luxembourg’s AAA rating to the country’s resilience to the shock of the COVID-19 pandemic. Luxembourg’s economic structure and its relatively low proportion of “in contact services”, as well as the broad support provided by the government to businesses and households impacted by restrictions, made it possible for the country to overcome the crisis with a strong economic performance. Its real GDP had already returned to pre-pandemic levels in the fourth quarter of 2020, and Fitch foresees a GDP growth of 4.6% in 2021, 3% in 2022 and 2.3% in 2023. The agency also predicts that the government deficit will fall to -2.3% of GDP in 2021 and be no more than -0.8% two years later.

The comfortable budgetary situation established in the years preceding the crisis, as well as the exceptionally high income per capita, made it possible for the country to implement a robust economic response to the pandemic while maintaining stable fundamentals.

Stable public debt

Public finances are central for the AAA rating, and although Fitch predicts an increase of Luxembourg’s public debt from 24.9% of GDP in 2020 to 28.3% in 2023, the debt ratio would remain the lowest among its AAA-rated peers and well below the AAA median of 44%. The soundness of Luxembourg’s finances is also an additional safety cushion against a possible increase in expenditure linked to aging over the coming decades.

“Fitch’s rating underlines the importance of sound public finances for a small country like ours,” comments Minister of Finance Pierre Gramegna. “It forms the basis for meeting the challenges of the years to come and enables us to fight back against the economic and social consequences of the pandemic. Our debt ratio is among the lowest among the AAA rated countries and I am convinced that by pursuing a prudent and balanced approach on the budgetary plan, Luxembourg will be able to face the future serenely.”

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